Bank to give Sentinel trustee control of some assets

(Crain's) -- The Bank of New York, where bankrupt cash-management company Sentinel Management Group Inc. had its accounts, has agreed to hand control of $128 million of Sentinel's assets to the bankruptcy trustee.

The bank and the trustee, Frederick Grede, asked for court approval Tuesday of the transfer of securities with a face value of about $106 million and $22 million in cash. The Bank of New York is holding the rest of the Sentinel assets it has -- about $745 million -- as collateral for a loan it made to Sentinel before its August collapse.

"We're taking control of what we can," Mr. Grede said in a phone interview. "The Bank of New York is claiming a lien against the other securities and assets."

Sentinel, which managed cash for futures brokers and hedge funds, blamed its collapse on a liquidity crisis brought on by turmoil in the credit markets. Mr. Grede last week sued Sentinel executives, accusing them of "long-term massive fraud" and looting at the expense of its customers.

According to the complaint, Sentinel executives used customer funds as collateral for excessive loans without those customers' knowledge or consent "and in violation of the legal requirement to keep customer accounts and assets separate from their own personal accounts and assets." Those loans, in short, were secured by collateral that wasn't Sentinel's to pledge, according to Mr. Grede's lawsuit.

According to the suit, that pattern of borrowing magnified gains in a rising market and exacerbated losses in the declining market it encountered at the end of July.

Sentinel had a $312-million loan from the Bank of New York when it filed for bankruptcy protection on Aug. 17.

The Bank of New York continues to hold $66 million in cash and securities with a $679-million face value, based on documents Mr. Grede submitted to the Bankruptcy Court.

Asked whether he would attempt to force Bank of New York to return the assets it's holding as collateral, Mr. Grede had no comment.